Best cheap UK shares to buy in December 2022
Which UK stock picks offer the best value this month?
The UK economy continues to be tumultuous and stock markets volatile as we head towards winter 2022. Despite the Bank of England raising interest rates multiple times, inflation has hit a 41-year high of 11.1% and a recession could be looming. It’s a difficult time for investors as many company share prices are under pressure and there could be tough times ahead over the short term. However, here are three shares we think are worth buying for their resilient qualities.
Phoenix Group looks undervalued
Shares in Phoenix Group are down 15% this year to 566.2p. This is due partly to the recent dip in pension providers and life insurance companies following the gilts crisis, precipitated by the poorly received mini-budget.
However, shares in the life assurer look undervalued on a price earnings (PE) ratio of 9, given the business delivers substantial cash flow. In the recent half-year results, Phoenix generated £950 million of cash (£872 million last year). The company bought Sun Life of Canada’s UK business for £428 million and paid for it entirely from cash.
Its solvency capital coverage ratio came in at 186% for the half-year, compared with 180% in the same period last year. Admittedly, Phoenix posted increased pre-tax losses of £1.7 billion; however, this was due to adverse investment return variances from its hedging strategies. Operating profits under IFRS were £570 million for the period and the company enjoyed record new business long-term cash generation of £430 million (£202 million the previous year)/
The outlook for the company is also upbeat. Sun Life UK is expected to deliver incremental long-term cash of £470 million, with 30% of this within the first three years of Phoenix’s ownership.
What’s more, Phoenix Group shares currently have a dividend yield of 8.7%, which has obvious attractions for income seekers.
Analysts at Goldman Sachs recently cut their price target on the shares to 660p from 770p. However, this still implies substantial potential upside for the shares and analysts at Barclays think they could reach 780p.
The company is hosting a capital markets event for analysts on Tuesday 6th December, which could potentially lead to positive newsflow.
Taylor Wimpey – showing resilience
Shares in housebuilder Taylor Wimpey are down 35% this year to 101.4p. Concerns are rising that the housing market will drop significantly next year. Estate agent Savills recently forecast a fall in UK house prices of between 5% and 10% due to rampant inflation and rising interest rates, which are making mortgage repayments more expensive.
However, Taylor Wimpey’s recent solid trading statement demonstrates the company’s resilience in tough times. The housebuilder maintained its earnings guidance for the full-year – unlike rival Persimmon, which said it was unable to confirm its guidance and warned it would be rebasing the dividend.
Taylor Wimpey delivered a net private sales rate of 0.74 homes per outlet per week for the year to date (2021: 0.95) and 0.51 homes per outlet per week in the second half of the year to date (2021: 0.91), as economic uncertainty took hold. The cancellation rate for the second half of the year to date was 24% (2021: 14). As of 6 November 2022, Taylor Wimpey’s current order book stood at c.£2.6 billion (2021: c.£2.8 billion), or 9,153 homes (2021: 10,643) of which 79% had exchanged.
Chief executive Jennie Daley says that while sales rates have been affected by the economic uncertainty, the company continues to "see good levels of customer interest.” The company expects to deliver full-year operating profit in line with previous expectations. Group volumes are anticipated to come in at “broadly similar levels to 2021” due to the market uncertainty.
While Taylor Wimpey acknowledged that higher mortgage rates would hit demand, it said it remained “confident in the long term sector fundamentals with a continued meaningful supply and demand imbalance in UK housing.”
Russ Mould, director of research at broker AJ Bell, says it’s “something of a miracle that it has taken this long for housebuilders like Taylor Wimpey to feel this kind of pain,” given that cost-of-living pressures and hike in raw material costs.
Analysts at broker JP Morgan Chase recently trimmed their price target from 180p to 170p, given the current economic climate. However, this still implies decent upside potential. While the shares are likely to take a while to recover, they could be worth buying.
Renishaw – enjoying demand for automation
Renishaw enjoyed a bumper year last year, with revenues up 19% to £671 million (from £565.6 million in 2021) and a 37% increase in adjusted pre-tax profits to £163.7 million (from £119.7 million the previous year). The precision engineer, which makes components and analytical instruments, is benefiting from increased demand for industrial automation, due to skill shortages and labour costs, plus increased investments in the semiconductor and electronics industries. However, shares in the company are down 23% this year to 3,936p.
Admittedly, Renishaw said in its recent trading statement that the order intake in the semiconductor and electronics sectors had softened. However, it also says that the new year has started strongly, that its order book “remains strong” and that it is “managing costs carefully and focusing on productivity.” First-quarter revenues were up 14% to £179.9 million (£157.8 million in the previous year) - including a £4 million currency benefit - while sales in its manufacturing technologies division rose 13% to £172.8 million (£152.3 million).
The company is experiencing strong growth in its core industrial markets and saw sales in its analytical instruments and medical device business jump 30% to £7.1 million. Pre-tax profits for the first-quarter were £38.6 million (£39.3 million in 2022) – the previous year’s figures were boosted by a £1 million currency gain.
Nevertheless, Renishaw looks well placed and is likely to demonstrate resilience during difficult economic times. Earlier this year analysts at Berenberg Bank lowered their target on the shares from 6,600p to 5,100p. However, this still suggests around 30% of upside potential.
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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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